Sofia, December 1 (BTA) - Standard&Poors on November 30 affirmed its 'BBB-/A-3' long- and short-term foreign and local currency sovereign credit ratings on Bulgaria. The outlook remains positive, the credit-rating agency said.

The positive outlook reflects the considerable likelihood that Bulgaria will join the Exchange Rate Mechanism II (ERM II) over the next 12-18 months, S&P says in the reasoning. The analysts believe that Bulgaria's aspiration toward eurozone membership would also support the country's continued effort to address remaining institutional impediments and structural issues.

S&P says they could raise the ratings on Bulgaria if the Bulgarian lev enters ERM II, which the agency expects to further support the credibility and effectiveness of monetary policy. Additional progress on institutional and structural reforms, for example regarding the judiciary system, could also facilitate improving creditworthiness.

The agency reasons that the ratings on Bulgaria reflect its very low government indebtedness and sound fiscal policies, as well as a track record of external deleveraging. The ratings also take into account remaining institutional impediments and Bulgaria's low GDP per capita relative to other EU member states. "Moreover, we factor Bulgaria's limited monetary policy flexibility under the currency board into our ratings, although the board has been an important anchor of stability for the country," says the analysis.

The analysts believe that near-term growth prospects are sound but longer-term structural challenges persist. They warn that political volatility could re-emerge as EU and local elections are coming up in 2019. Labour shortages are emerging as a key structural constraint for businesses, partly reflecting Bulgaria's demographic challenges.

The reasoning to the rating actions further says that Bulgaria's economy continues to expand at a robust pace despite a slight deceleration (to a 3.6% forecast for the entire 2018 from 3.9% in the previous S&P review). Exports were weaker than expected at the beginning of the year.

Conversely, domestic demand soared as private consumption rose by over 7% in the first half of the year. This was mainly driven by strong labour market developments: unemployment fell to a 10-year low of 5.9% in October.

The analysis looks in details at the employment statistics and says that due to falling unemployment labor shortages are set to emerge. This is exacerbated by Bulgaria's demographic profile due to aging and emigration, with a projected decline of the population by around 5% by 2025. Furthermore, Bulgaria's labor force participation rate remains below the EU average, partly reflecting skills and regional mismatches.

The harmonized index of consumer prices has accelerated over the course of 2018, reaching 3.6% year on year in October 2018. At the same time, nominal wage growth has slowed compared with 2017. S&P think that wage growth is important for Bulgaria's income convergence with the EU average, and we currently do not observe pressures on external competitiveness, for example, as market share of Bulgaria's exports increase. In turn, Bulgaria is exposed to potential weaknesses in external demand from its main European trading partners.

Potential growth rates will remain constrained by the decreasing working age population. Although net emigration is set to slow somewhat, public education and infrastructure bottlenecks remain structural impediments to faster income convergence.

The analysts say that perceived institutional weaknesses remain although they note the reform of anti-corruption legislation earlier this year.

The newly established anti-corruption agency will have to garner credibility by building an unwavering track record of pushing back illicit activities.

The analysis says that the efficiency of the judiciary system remains a perceived weakness of the business environment, not least due to the crucial importance of unbiased contract enforcement. MY/LN/